The current cycle got underway after the financial crisis, during which UK property prices fell almost 20%. That was a bust with a small “b” compared to the US and Ireland. After the 1990s downturn in the UK, the ratio of house prices to average worker incomes bottomed at about three times, according to Nationwide Building Society. In 2009, this measure troughed at six for London and five for the UK: Property never touched bargain levels when measured relative to wages.
The London bubble quickly reinflated. As is well known, weaker sterling made the capital’s prime districts cheap to international buyers, stimulating activity in other neighborhoods. The finance sector — and banker pay, now in the form of higher fixed salaries — staged a surprise revival.
A cut in the UK’s base rate to 0.5% meant borrowing costs were very low when the mortgage market reopened. Those who could amass the deposits required for a home loan could get great terms. That played to London and the southeast.
The eurozone crisis saw London attract more foreign money as a safe haven. In 2013 came taxpayer-funded schemes to support homebuyers; house-price-to-income ratios in the capital soared past their pre-crisis peak that same year. Competition among lenders saw two-year fixed mortgage rates halve between mid-2012 and mid-2015, fueling the upswing.
But London’s frothiness prompted counter measures that have kept property-price growth in check by limiting the use of leverage. They’ve so far prevented a boom or a bust. The government imposed higher taxes on purchases of high-value properties and second homes. The Bank of England set limits on what banks could lend as a multiple of borrowers’ income and required them to stress-test how buyers would cope if rates rose.
The result: London overall has traded sluggishly from 2016. Its property prices relative to average earnings have nevertheless stayed above a giddy 10 times, meaning purchases with mortgages require large deposits. That’s forced many buyers to look further afield. Covid amplified the appeal of the hinterlands as city dwellers sought space and retirees reconsidered their needs. Lately, London has picked up again, although Brexit uncertainty appears to continue to have dampened interest from international buyers even amid sterling fragility.
Growth in the far cheaper market in the rest of the UK gained speed during the pandemic. It might be a stretch to call this a full-blown boom. Prices relative to earnings are just above the pre-crisis peak, but mortgage rates remain lower. First-time buyers’ mortgage payments are running at 31% of take-home pay for the UK as a whole, versus 46% before the 2007 crash, according to Nationwide (in London, they’re at 51%, versus 62% pre-crisis.)
As the economic context shifts, the market must contend with both tighter borrowing conditions and inflation cutting the income available to service home loans. Most UK mortgages are at fixed rates and not immediately susceptible to increases in the BOE base rate. In the coming years, those deals will expire into a tougher climate.
So post-crisis financial regulation faces a test. Before long, we will discover whether the steps taken to cool the market in the middle of the last decade succeed in preventing borrowers from taking on loans they can’t afford at higher rates.
Based on a model of average household incomes and mortgage rates, UK house prices don’t look overvalued to the extent they were before the financial crisis or 1990s recession, although mortgage rates above 4% could see flat to slightly falling prices, says Richard Donnell, executive director at property website Zoopla. An era of lower gains lies ahead, with nominal house prices tracking earnings growth, he reckons.
The relative cheapness of the UK regions — and the government’s commitment to boost them — suggests the UK market as a whole could still hold up better than the capital. Moreover, volatility in global stock indices has put the brakes on investment-banking activity, which will hit London’s financial sector this year.
Whatever the relative performance of capital versus county, a period of pedestrian growth or shallow declines would be a financial-policy success. Housing is infrastructure and should perform as such rather than jumping around in double-digit percentages. After all, a Briton’s home is their castle — not a hedge fund.
More From Bloomberg Opinion:
• UK Cost-of-Living Crisis Petrifies Tenants: Marcus Ashworth
• Boris Johnson’s Housing Headaches Aren’t Over: Therese Raphael
• Housing Market Cooldown Will Lead to More Dysfunction: Conor Sen
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
More stories like this are available on bloomberg.com/opinion
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